Posts Tagged ‘Economy’

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED AUGUST 7 2009

August 17, 2009

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR

WEEK ENDED  AUGUST 14 2009.

 

 

 

 

Market Statistics                  52 week
            Low High
Dow Jones (48.67 points) (0.52%) to 9,321.40   6,547.05 13,058.20                                             
Nasdaq (7.91   points) (0.49%) to 1,611.58   1,268.64 2,549.94
S&P 500 (6.39   points) (0.63%) to  1,004.09      676.53 1,426.63
Crude Oil ($3.42/barrel) (4.82 %) to  $67.51   $33.87 $145.29
Gold ($10.30/oz) (0.80%) to  $947.00   $704.90 $1,001.80
10 Year Tsy (0.294%) to 3.558%   2.04% 4.32%
             
             

 

 

 

 

 

 

 

 

 

 

 

 

OVERVIEW:

We heard the same rhetoric this week  that we have been hearing for some while now, that the economy is no longer in a tailspin, that it appears to be leveling out rather than declining at a slower rate and that we appear to be moving into the recovery stage, albeit at a slow rate with continued high unemployment.

Our previous weekly blogs have been emphasizing our belief that without effectively addressing some fundamental issues, far from seeing an economic recovery, however tepid, we can see the economy falling back into a recession sooner rather than later.

Weakness in the banking sector, (another of our concerns ),particularly at the regional level , was highlighted last Friday with the closure by the FDIC of Colonial BancGroup, AL, the sixth largest bank failure in US history and by far the largest this year. With $25 billion in assets ,the closure is estimated to cost the FDIC trust fund $2.8 billion.

We do not envy the Administrations task, because there is a fine line between managing a sustainable recovery without overshooting and creating high inflation and taking action to stop another freefall into a recession.

Why do we continue to be the ‘downers’ in what has been a clear recovery away from the near collapse of the financial system last year? It is because, it is not enough to have enacted a stimulus plan (which in any event, we consider too slow to trickle down to spur growth and have too little emphasis on job creation at the expense of entitlements) without addressing the core issues we keep listing in our weekly blog.

Bill Clinton’s famous phrase that was effectively used in the  1992 Presidential campaign against George H.W. Bush  “It’s the Economy, Stupid”, may come  back to haunt the Democrats in the 2010 mid term elections where there are 36 of 100 Senate seats being contested, as well as the next Presidential election in 2012.

At the moment we can say “It’s the Consumer, Stupid” and there will be no recovery without the consumer feeling better about daily issues such as housing, employment ,taxes, stock market stability which need to improve and be sustainable for consumer spending to recover.

 

STOCKMARKET:

 The declines, albeit modest in all the major indexes, reflected the concern we referred to above, namely about consumers. The latest index of consumer sentiment, from Reuters/University of Michigan last Friday showed a drop from 66 in July to 63.2 in August (consensus was 68.5). This followed weaker than expected retail sales for July (down 0.1%) after rising 0.8% in June (consensus was 0.7% gain).

 

COMMODITY MARKET:

 As confidence in any meaningful economic recovery waned this past week, so did investor appetite for commodities, which typically they have been turning to as a hedge against inflation and as their appetite for more riskier assets increased. With nothing to change this past weeks scenario, at least in the short term, we should expect to see further declines in prices of oil/gold as investors move back to less riskier assets such as Treasuries.

 

CREDIT MARKET:

 As the markets absorbed the auctions this past week, prices rose modestly (yields inversely declining ). To the extent we continue to see a weaker economic picture continuing ,with equities and commodities declining, we should see continued movement into the ‘safe haven’ assets with the US Dollar rising; Bond demand rising and it’s  yields continuing to fall.

 

John Jacobs 

 

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REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED AUGUST 7 2009

August 10, 2009

 

 

 

 

Market Statistics                  52 week
            Low High
Dow Jones +198.46 points +2.16% to 9,370.07   6,547.05 13,058.20                                             
Nasdaq +16.13   points +1.01% to 1,619.49   1,268.64 2,549.94
S&P 500 +23.00   points +2.33% to  1,010.48      676.53 1,426.63
Crude Oil +$1.48/barrel +2.13 % to  $70.93   $33.87 $145.29
Gold +$3.60/oz +0.38% to  $957.30   $704.90 $1,001.80
10 Year Tsy +0.10% to 3.852%   2.04% 4.32%
             
             

 

 

 

 

 

 

 

 

 

 

OVERVIEW

 What  an amazing ride this has been these past weeks! Despite our continued skepticism in our previous blogs about what we see as weak market fundamentals

not justifying the surge in prices ,the markets continue to defy what we thought was a logical analysis of the economy. In our June 5 blog we opened with a quote attributed to John Maynard Keynes which deserves repeating here:

“The market can stay irrational longer than you can stay solvent”.

Like everyone else, we too have read all the prognostications from respected market observers effectively signaling the end of the recession by years end, pointing to all the economic data as justification. We produced a list of issues we have been greatly concerned about and despite the big market moves,none of them have been effectively addressed. At the risk of repetition they are from our July 17 blog:

  • Serious damage to consumer equity which will take time to repair.
  • Unemployment which will continue to rise.
  • Toxic assets on Bank’s balance sheets which have not been effectively addressed.
  • Deterioration in the Commercial mortgage sector.
  • Stress on States with large Budget Deficits.
  • Rising National Budget Deficit due to the Stimulus Package, funding for Afghanistan and Iraq and declining tax revenues tied to the recession.
  • Economic impact of proposed legislation on Health Care and Climate Control .

We’ll keep pointing them out, even as the market continues to rise!

 

STOCK MARKET.

A myriad of positive news propelled the broad based market increases this past week, whether it was the success of the ‘Cash for Clunkers Program’, better than expected factory orders, fewer jobs cuts in July than June, drop in new claims for jobless benefits etc, etc. Goldman Sachs, on top of all the news, declared U.S stocks as having entered a new bull market with the S&P in a range of 1,050-1,100 toward year end. We have no idea how high this new up phase in the markets will go, we do believe that, while it is on the upward part of an apparent ‘V’ shape, there will be a significant retreat below that which would represent even the downward leg of the ‘W’.

We are now still in the “relief rally” and far from any positive growth/earnings news as opposed to “less bad”, we still have the issues bullet pointed above that are going to hit and create a return to reality, perhaps not challenging the  52 week lows ,but nevertheless a significant retracement.

 

COMMODITY MARKET;

Just as the confidence levels have returned to the stock market, so the move away from risk averse assets such as Treasuries  into commodities has accelerated. Whenever economic optimism grows, so do prices ,particularly of industrial metals such as Copper, Palladium, Platinum and Silver. Gold continued to increase although oil fell of it’s six week highs.

 

CREDIT MARKET:

We have talked in the past about the importance of the 10 year Treasury on mortgage rates. The rise in this rate over the past weeks has been because of the brightening economic outlook as well as the increased supply of debt coming to market. It could well test the 4% level soon and have a significant impact on any housing market recovery due to rising mortgage costs.

John Jacobs

 

 

 

 

 

 

 

 

 

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JULY 24 2009

July 27, 2009
Market Statistics                   52 week
            Low High
Dow Jones +349.30   points +3.99% to 9093.24   6,547.05 13,058.20                                             
Nasdaq +79.35     points +4.21% to 1965.96   1,268.64 2,549.94
S&P 500 +38.88     points +4.13% to   979.26      676.53 1,426.63
Crude Oil +$3.47/barrel +5.37% to $68.05   $33.87 $145.29
Gold +$15.60/oz +1.66% to $952.80   $704.90 $1,001.80
10 Year Tsy +0.020% to 3.671%   2.04% 4.32%
             
             

 

 

                                                                                                      

 

 

 

 

 

 

 

 

WALL ST JOURNAL

 

 

 

OVERVIEW:

 

We could almost replicate our blog of last week.  It was another strong performance, in terms of how the markets reacted to continued “good news” on the earnings front. Even when there was disappointing earnings news, as with Microsoft and Amazon, the markets stayed remarkably resilient. Let’s remember however that earnings expectations were set  low to start with and so any improvement was likely to result in cash sitting on the sidelines being deployed into the equities markets.

 

 CIT obtained $3 billion  financing from it’s bondholders, giving it breathing space, rather than any long term security and  justified the Administrations strategy not  have it come under the “too big to fail category” with the resultant taxpayer rescue package.

 

In keeping with our “let’s not pop the champagne just yet” mentality, the economy at large, as well as the States  and the financial institutions , remain of great concern to us ,despite all the euphoria in the press this past week. We have spoken at length in previous blogs about the continued weakness of the consumer and the negative drag to any future growth, so we won’t repeat that here( we listed seven areas of concern only last week about the economy at large).

 

 Fed Chairman Bernanke’s testimony before the Senate Banking Committee this past week rightly addressed the concern of rising unemployment, which if not addressed, would inhibit any recovery, which, by general consensus was likely  to be modest, at best. One of the companies we feel  indicates which way the economy is going, is UPS. This past week, it’s CFO gave a sobering  indication of where the company was and is likely to go. In a conference call Kurt Kuehn stated that there was no material uptick in growth in July and questioned when business activity was likely to strengthen. He indicated that “The business environment in the third quarter should be similar to the second quarter”.

 

State tax collections, according to the Rockerfeller Institute of Government, fell 11.7% in the first quarter, compared to the same period last year, the sharpest decline since records began 46 years ago. Revenues declined in 47 of 50 states and an early look at the second quarter indicates a drop near 20%. This has significant implications for states in terms of cutting back on spending and/or raising local taxes.

 

From the Banking perspective ,we continue to be concerned, particularly with respect to the deteriorating quality in the  residential and commercial loan portfolios. We question whether the latter has been effectively addressed by the sector, in terms of adequate loan loss allowances to cover non performing loans.

 

STOCK MARKET:

Another 2009 milestone was reached this past week, as the Dow crossed the 9000 mark and more importantly, held there. With the huge gains of the past two weeks all of the major indexes are in positive territory for the year, with the tech laden Nasdaq the most impressive performer up 24.7% .Even with this, it is still 20.5% below it’s 52 week high. The Dow and S&P have even more ground to make up.

Goldman Sachs added to the positive mood in the markets, by raising it’s S&P forecast from 940 to 1060,based on earnings improvement driving a second half rally (the Index having passed the initial forecast anyway). We should also note an unusually large bearish options position was placed this past week, by one trader (believed to be $10 mill) fearing the S&P benchmark ETF could suffer significant losses between now and December.

 

COMMODITY MARKET:

As in the previous week, the commodity markets were beneficiaries, along with the stock market, of funds moving out of risk averse assets into these higher risk ones. Crude oil is now up 52.58% for the year while gold a much more modest 7.83%.

 

 

CREDIT MARKET:

The market held up quite well this past week as money poured into equities and commodities. This coming week, however, will be a big test for the credit market ,with a record amount of new debt being offered ,amounting to $200 billion. If the increase in  risk appetite carries over from the past two weeks ,then we are going to see higher yields by week’s end.

 

John Jacobs.

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JULY 17 2009

July 20, 2009

 

 

 

 

Market Statistics                   52 week
            Low High
Dow Jones +597.42  points +7.33% to 8743.94   6,547.05 13,058.20                                             
Nasdaq +130.58  points +7.44% to 1886.61   1,268.64 2,549.94
S&P 500 +61.25  points +6.97% to   940.38      676.53 1,426.63
Crude Oil +$3.67/barrel +6.13% to $63.56   $33.87 $145.29
Gold +$25.00/oz +2.74% to $937.20   $704.90 $1,001.80
10 Year Tsy +0.354% to 3.651%   2.04% 4.32%
             
             

 

 

                                                                                                      

 

 

 

 

 

 

 

 

 

 

WALL ST JOURNAL

 

 

 

OVERVIEW:

Take a deep breath and hold onto that smile after the sizeable gains in all the “at risk’’ investments this past week, but keep the indigestion tablets nearby.

We said last week that eyes would be on second quarter earnings reports and the “big names” did not disappoint a market looking for good news. Goldman Sachs in the financials and Intel/IBM in the technicals reported strong results and positive guidance. The credit card issuers reported lower delinquencies in June, leading to a big rise in shares of American Express and others for the week.

Those investors moving back and forward between risk aversion and increased risk appetite threw caution to the wind and bought up equities and commodities and moved out of Treasuries.

 We really aren’t gloom and doom (you might think otherwise after our previous blogs), but we continue to be concerned about the dark clouds out there. While it is perhaps no longer the “Day After Tomorrow” scenario, it’s also not clear blue skies and calm sailing, just because of the past week. We have talked about the following issues and they still loom large over the economy:

  • Serious damage to consumer equity which will take time to repair.
  • Unemployment which will continue to rise.
  • Toxic assets on Bank’s balance sheets which have not been effectively addressed.
  • Deterioration in the Commercial mortgage sector.
  • Stress on States with large Budget Deficits.
  • Rising National Budget Deficit due to the Stimulus Package, funding for Afghanistan and Iraq and declining tax revenues tied to the recession.
  • Economic impact of proposed legislation on Health Care and Climate Control .

 

We believe there is still a disconnect between market optimism and reality of the  economic fundamentals.

 

STOCK MARKET:

The numbers speak for themselves in the strength across the board , the best since March. The unknown last week was whether CIT, a key lender to small and medium size businesses was going to be able to avoid bankruptcy, as it did not appear to fall in to the Government’s “too big to fail” category with respect to systemic risk. While it may not fall within the definition, the financial impact on the business sector which is the driver for economic recovery will be significant.

Where are the markets after such a huge week? They are still in negative territory for the year albeit in single digits. The momentum of last week is likely to carry through for part of this week, but we cannot see any significant forward movement .

 

COMMODITY MARKET:

As the good news poured in last week, the commodity sector shared in the appetite for more risk .But just as the stock market rose in the face of concerns we have raised above, so have the commodity markets, particularly in the light of likely continued  weak demand .How long does the momentum last ?We haven’t a clue ! We do know that as is typical in these  markets, the pros will be out just as the smaller players buy in.

 

CREDIT MARKET:

Treasury prices  fell (yields rose)  as investors moved away from  risk averse assets into equities and commodities, reversing the trends of the past month. With no major auctions this week, any movements will be reflective of the equities and commodities.

 

John Jacobs

 

 

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JULY 10 2009

July 13, 2009

 

 

 

 

Market Statistics                   52 week
            Low High
Dow Jones (134.22points) (1.62%) to 8146.52   6,547.05 13,058.20                                             
Nasdaq (40.49 points) (2.25%) to 1756.03   1,268.64 2,549.94
S&P 500 (17.29points) (1.93%) to   879.13      676.53 1,426.63
Crude Oil ($6.84/barrel) (10.25%) to $59.89   $33.87 $145.29
Gold ($18.50/oz) (1.99%) to $912.20   $704.90 $1,001.80
10 Year Tsy (0.250%) to 3.297%   2.04% 4.32%
             
             

 

 

                                                                                                      

 

 

 

 

 

 

 

 WALL ST JOURNAL

 

 

 

 

OVERVIEW:

There was a recurring theme last week in the continued decline in the stock market which really was a continuation of the previous week in that there will not be a sustained recovery anytime soon ,if there is one by strict economic definitions it will be a ‘jobless” one where unemployment will remain at or close to double digits into 2010 and that we are in for a long haul with lackluster economic growth. Sounds like a broken record doesn’t it?

That is because as we have said time and again, the consumer will not lead us out of the recession until house prices recover, jobs are created and consumers feel confident enough to spend rather than save. Banks need to lend to small and medium size businesses which are the backbone of the economy and the economy must have resources  focused in the short term more on growth not entitlement programs, however socially desirable they are.

 The key questions floated this week are:

  • Do we need a second stimulus package since the first has not worked to date?

The prevailing sentiment is a no for two different reasons. One, that the first stimulus funds would not be felt until 2010,so give it a chance. Two, since the first will not work anyway as it is not focused on job creation, why increase the deficit even more ?

  • Is the Obama Administration taking on too much too soon?

Between the Stimulus, Healthcare and Climate Control, is the Government not focusing sufficiently on ensuring economic recovery before it addresses the other issues? We are on the side of a more limited program where the economic and political capital required is much more concentrated  on the economic recovery.  We understand the argument that they are all critical ,but you cannot have success in the latter two without achievement in the first.

 

We have talked ad nauseam about our concerns regarding the Banking sector and particularly the huge amounts of toxic assets on bank’s balance sheets (estimated at between $2-$4 trillion).Earlier this year the Government announced a plan called ‘PPIP’(Public-Private Investment Program) designed to take up to $1 trillion of toxic assets of banks balance sheets. The Program was unveiled this past week with the amount now down to $40 billion! Both it’s  reduced size and  expected reluctance of banks to participate (what’s their incentive with suspended mark to market rules?) renders any attempt to address the toxic securities, too little too late.

 

STOCKMARKET:

All of the above led the broad averages down heavily for a second consecutive week as  the major indexes stayed below their 50 day moving averages. Eyes were mostly focused on the coming week’s second quarter earnings reports as an indicator of performance in this difficult economy. What is of greater significance for the market is not what has happened but where companies will guide in terms of future performance over the subsequent quarters. That’s where investors will focus.

 

COMMODITY MARKET:

All commodities were under selling pressure this past week as risk aversion was the underlying tone in the financial markets, which shows up in selling equities and commodities; buying the US$ and Treasuries. Oil was particularly affected by the Commodity Futures Trading Commission (Commodity Regulator) focus on the speculative impact on the huge run up in oil prices this year (34.3%) and it’s recommendation for proposed limits on such speculative trading.

 

CREDIT MARKET:

 Strong demand in the auctions (safe haven effect) pushed 10 year Treasury yields down for the week. The Wednesday 10 year auction saw the biggest demand since 1995.As recently as one month ago the yield went over 4% and so if there is any positive news it is that a likely continued lower yield would help mortgages and help with home refinancings.

 

 

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JULY 3 2009

July 6, 2009

 

 

 

 

Market Statistics

 

                 52 week
            Low High
Dow Jones (157.65points) (1.87%) to 8280.74   6,547.05 13,058.20                                             
Nasdaq (41.70 points) (2.27%) to 1796.52   1,268.64 2,549.94
S&P 500 (22.48points) (2.45%) to   896.42      676.53 1,426.63
Crude Oil ($2.43/barrel) (3.51%) to $66.73   $33.87 $145.29
Gold ($10.00/oz) (1.06%) to $930.70   $704.90 $1,001.80
10 Year Tsy +0.042% to 3.547%   2.04% 4.32%
             
             

 

 

                                                                                                      

 

 

 

 

 

 

 

WALL ST JOURNAL

 

 

OVERVIEW:

Markets were closed Friday in celebration of July 4 and that was a welcome pause. There was only one significant driver of the markets last week, which was the darkening news   on unemployment. The  rate went from 9.4% in May to 9.5% in June, which in itself is bad enough, at the highest level since August 1983, but what a number of analysts commented on was a far more serious picture than just this percentage. They focused on what are called the “Underemployed” or “Underutilized” workers-those who have not just lost their jobs ,but also workers who have had their hours cut and are now part time, as well as those who have become discouraged and have stopped looking. While there are differing numbers in the press this week, by adding in those we arrive at a rate of between 16.5%-19.5% of workers in this “Underemployed” or “Underutilized” category ! To further illustrate the seriousness of the problem, since the recession began in December 2007,the economy has lost a net 6.5 million jobs and the average work week has fallen to 33 hours, the lowest on records dating to 1964.

Why have we focused so much on this? Because it has already led to talk that the $787 billion Stimulus plan has been ineffective and that a second stimulus will be needed to revive the economy. Joe Biden was quoted in the Wall St Journal of July 6 as saying that the Obama Administration “misread how bad the economy was” and didn’t foresee unemployment levels nearing double digits. We cannot see the Administration agreeing to this additional Stimulus anytime soon, since they have publicly stated that only about 10% has been spent to date and that the effects will be positively felt as the money filters into the economy over the next 12-18 months .We also do not believe politically they can wait that long, however, since not enough of the Stimulus plan will help job creation as opposed to supporting entitlements as unemployment will continue to rise.

We do not want to be pessimistic about sustained economic revival, but there is not much to be optimistic about. As we have said before we do not believe the Banking sector problems have been adequately addressed in terms of the non performing assets (a nicer way of saying toxic assets) being disposed of; the consumer contribution to economic growth is going to be virtually non existent in the near term and taxes (however they are described) are going to rise. Much has been talked about at the national level and of course California’s problems have been covered, but of the 10 States in 2010 with the biggest budget gaps,6 are some of the most  populous  ie California; Florida; llinois, New Jersey and New York. At local levels it is not just service cuts that are being discussed but local tax increases. Florida for instance raised the State cigarette tax $1 effective July 1,after a 62cent increase at the Federal level 3 months before.

 

STOCK MARKET:

As we have stated, unemployment news drove the markets down this past week. The S&P which we like to use as a broader market indicator, is back to where it closed on May 12 and appears to be stuck in trading ranges reflecting the uncertainty of general market direction. It would be technically significant, but highly unlikely that it can break through its 956 resistance level near term. Volume was sluggish in pre holiday trading, which if we could find any positive news last week, that was it.

 

COMMODITY MARKET:

There was continued civil unrest in Nigeria which limited about 25% of the nations daily  oil production capacity, but that was overshadowed by the mid year International Energy Agency Report which detailed falling demand for oil .

In the general commodity sector this past week, the uncertainty about an economic recovery anytime soon and the market sense that commodity prices had built a recovery and ensuing inflation into them, have now seen a retracement and are likely to remain soft.

 

CREDIT MARKET:

With stocks and commodities being sold last week ,there was a flight to Treasuries as a ‘safe haven’ which kept yields down in the shorter end Treasuries. There is a large supply coming to market this week  ($136 billion), but with the economy not poised for a quick recovery, yields are unlikely to rise much in the weeks to come.

 

We hope our Weekly Review can be more upbeat next time around!

 

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 26 2009

June 29, 2009

 

 

 

 

Market Statistics

 

                 52 week
            Low High
DowJones (101.34points) (1.19%) to 8438.39   6,547.05 13,058.20                                             
Nasdaq +10.75 points +0.59% to 1838.22   1,268.64 2,549.94
S&P 500 (2.33 points) (0.25%) to   918.90      676.53 1,426.63
Crude Oil ($0.86/barrel) (1.23%) to $69.16   $33.87 $145.29
Gold +$5.10/oz) +0.55% to $940.70   $704.90 $1,001.80
10 Year Tsy (0.287%) to 3.505%   2.04% 4.32%
             
             

 

 

                                                                                                      

 

 

 

 

 

 WALL ST JOURNAL

 

OVERVIEW:

As can be seen from the numbers above, the stock indexes spent the week looking for direction amid contradictory economic news and even more contradictory statements about its direction from the market observers. This largely mirrors ambivalent feelings about the economy at large.

At the opening of the week, the markets dropped across the board as a World Bank Report came across the wires warning the global economy could contract at a rate of 2.9% this year (it’s earlier forecast was for a drop of 1.7%) and could grow at 2% in 2010 versus 2.3% previously. This brought out those fearing deflation and caused stocks and commodities to fall and Treasuries to rise. On Wednesday the Federal Open Market Committee did nothing to change market sentiment by maintaining its existing policy of keeping the target short term federal funds rate low (0%-0.25%) and not boosting Treasury Purchases (up to $300 billion) to keep the long term Treasury rates low . It said the economy “is likely to remain weak for a time”.

There is constant talk about whether there are “green shoots” appearing in the economy and whether we are likely to see a “V”, “U”, “L”, “W” or the latest “WWW” (known as the Internet recession) recovery. The reality is there is no consensus, other than it will not be a “V”. We have talked a lot about the need to see trends to confirm any  meaningful  economic movement one way or the other, but they are just not there. There is too much mixed news at present. If we were to go with our gut feel at the moment, it is on the downside. Why ? Too much consumer pain lingers; hesitance on the corporate side to invest; the banking sector, particularly  regional banks is still in serious financial condition; no effect from the stimulus package on job creation; home prices continue to decline; no global recovery in the works and  proposed legislation whether Cap & Trade or Health Care will likely negatively affect consumers through higher taxes, however they are couched….we could go on.

 

STOCKMARKET:

We talked last week about the importance of the steep drop in the Transportation Average (down 4.21% the previous week ) and this week it rose, but only 1.34%.The KBW Bank Index (which dropped 3.34% in the previous week) dropped a further 2.44% in the past week. This Index is down almost 18% for the year and we will continue to keep a close eye on this barometer of banking health .

We need to keep in mind that when we have seen a major decline across the board, as we saw on Monday when the NASDAQ and the S&P were both down greater than 3%,it has been on declining volume, making the decline less damaging than it might have been. We always want to have consecutive strong up days accompanied by rising volume and consecutive down days  accompanied by falling volume. This tells us how the Institutions look at the market. We have not seen consecutive up days with strong volume to make us optimistic about any sustained market uptrend.

 

COMMODITY MARKET:

Commodities recovered as the week went on as oil initially fell below $67 /barrel for the first time in three weeks based on economic weakness in the US and globally and then rose over $70/barrel based on Nigerian pipeline attacks and a return by investors to more riskier assets (commodities) and away from the safe haven US dollar. We should note that this sentiment in and out of so called safe havens literally changes within a trading week and offers no clear direction for commodities at present-much like the stock market in general.

 

CREDIT MARKET:

This was the one market this past week that established a clearer trend throughout the week. Having rallied early in the week on the World Bank Report and a successful auction of Government debt, Treasury prices continued to rise on a further successful auctions during the week. To quote a market strategist” The Treasury is having relatively few, if any, issues selling it’s debt”. What does that mean? Well,  Treasury prices rise (and yields fall) as demand is strong .There has been a great deal of concern that with so much coming onto the market, the opposite would happen ,that yields would rise, particularly on the barometer 10 Year Treasury (which impacts consumer rates).In fact the yields on the 10 year have fallen to their lowest levels since May.

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 19 2009

June 22, 2009

 

 

 

 

Market Statistics

 

                 52 week
           

Low

High
DowJones (259.53 points)

(2.95%)

to

8539.73

  6,547.05 13,058.20                                             
Nasdaq (31.33 points)

(1.69%)

to

1827.47

  1,268.64 2,549.94
S&P 500 (24.98 points)

(2.64%)

to

921.23

  676.53 1,426.63
Crude Oil ($2.49/barrel)

(3.46%)

to

$69.55

  $33.87 $145.29
Gold ($4.50/oz)

(0.48%)

to

$935.60

  $704.90 $1,001.80
10 Year Tsy +0.009% to

3.792%

  2.04% 4.32%
     

 

     
     

 

     

 

 

                                                                                                       

 

 

 

 

 

 WALL ST JOURNAL

 

OVERVIEW:

Little has changed from our previous blogs where we have restated again and again; that the relief rally being over, any further stock market rises cannot be justified by the economic fundamentals in the economy. Besides the continuing discussion in the financial press about what direction is the economy heading-deflation or inflation, there is a debate also continuing, about how effectively have the actions of the Administration dealt with the underlying problems in the financial system? This past week the Administration announced plans for greater regulation of the financial sector. It put greater power in the hands of the Federal Reserve to determine which companies would require more scrutiny if it determines they represented  systemic risk to the economy .The Fed could require greater capital, liquidity and leverage constraints. We hope the outcome  does not mirror such Government sponsored entities as Freddie Mac and Fannie Mae.

We still have billions of dollars of toxic assets on Banks balance sheets, we are skeptical that the stress tests given to banks were conservative enough and we are amazed that one of the causes of the financial collapse, the Rating Agencies, appear to have emerged from the proposed reforms largely intact in terms of how they operate.

The decline in markets this past week reflected investors realization about continued risks in the economy and that any hopes for a quick recovery have largely disappeared. Further large upcoming   Treasury auctions have kept yields high.

STOCKMARKET:

Analysts (who we admit haven’t got much right over the past year or so),have been largely talking about a correction in the markets ,based on the lack of any positive information about economic fundamentals likely to push it higher. We have talked in the past about the need for positive trends in the economic fundamentals, not just one month here and there and we are some way from seeing these trends justify higher sustainable levels. The bearish nature of the markets this past week reflected weakness in two key averages which are not always highlighted, the Transportation Average (down 4.21%) and the KBW Bank Index (down 3.37%).The Transportation (comprising  20 railroad, trucking, ocean and airline corporations) is regarded as a leading economic indicator, while the KBW Index reflects 24 Money Center and Regional banks(Standard& Poors this past week downgraded 18 banks and revised it’s outlook on four others citing increased regulation and likely lower profitability in volatile markets).

The Dow and S&P are back to their May 8 closing levels while the NASDAQ  is up about 5%, reflecting the greater confidence investors appear to have in the technology sector to lead any economic recovery. We see no near term reason for the markets to move higher.

 

COMMODITY MARKET:

Despite continued unrest in Iran and Nigeria, oil ended the weak lower, due to a stronger Dollar and as geo political concerns were outweighed by a continued global recession, weaker energy demand. and a perceived glut in the energy markets. There is a belief that steep  prices of late do not reflect fundamentals, but rather speculation, although the latter is hard to prove. 

 

CREDIT MARKET:

The Treasury is auctioning a further $104 billion in notes this week and it will be interesting to see whether yields by the end of the week, continue to rise on future inflation and rising interest rate fears or fall based on  deflation concerns. Last weeks economic news supports a continued weak economic picture and no  fundamental basis for any rate increases.

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 12 2009

June 15, 2009

 

 

 

 

Market Statistics                   52 week
           

Low

High
DowJones +36.13points

+0.41%

to

8799.26

  6,547.05 13,058.20                                             
Nasdaq + 9.38 points

+0.51%

to

1858.80

  1,268.64 2,549.94                                               
S&P 500 + 6.12 points

+0.65%

to

946.21

  676.53 1,426.63
Crude Oil +$3.60/barrel

+5.26%

to

$72.04

  $33.87 $145.29
Gold ($21.60/oz)

(2.25%)

to

$940.10

  $704.90 $1,001.80
10 Year Tsy (0.078%) to

3.783%

  2.04% 4.32%
     

 

     
     

 

     

 

                                                                                                       

 

 

 

 

 

 WALL ST JOURNAL

 

 

 

 

 

 

OVERVIEW:

Who do we look to for guidance to navigate through the unpredictable economic signals? Used to be that there were “gurus” out there who, based on “proven” economic models would predict economic performance. Virtually every guru was wrong in the recent economic collapse, as was every economic model and that’s why we seem to be seeing more questions than answers about what the current economic scenario means for the future. All we can do is look at what we know and join the list of prognosticators.

This past week saw the first repayments of the Government TARP (Troubled Asset Relief Program) Funds as 10 lenders won U.S. Treasury approval to repay $68.3 billion, effectively creating winners and losers in the US Banking market. Winners  included J.P. Morgan Chase, Goldman Sachs and Morgan Stanley while the losers included Citigroup and Bank of America.

It was a relatively calm week in the stock markets, despite a continued spike in oil prices and a 10 year Treasury that reached close to 4% during the week.

The Congressional Oversight Panel for the Government’s financial rescue package reported this past week that the Federal Reserve used a “conservative and reasonable” approach during it’s stress testing of the nations 19 largest banks. Of concern was that they added that the Fed’s worst case scenario may not have gone far enough. As an example, stress tests related to unemployment  were based on average 2009 rate of 8.9%.In May it was 9.4% and likely to rise. So the question is, did they overstate the financial health of the banks under this worst case scenario, particularly since the toxic assets are still on their books?

 We are seeing the beginning of a slow, but concerted effort by Developing countries to diversify away from the US Dollar as a reserve currency. The “BRIC” nations, Brazil, Russia, India and China, generally regarded as the fastest growing Developing Countries, are planning to sell $10 billion of US Treasuries and buy IMF securities(denominated in a quasi  currency, Special Drawing Rights).This announcement raised Treasury yields to their highest level of the year.

 

We have reported about the mixed economic data coming out and this past week was no exception. Retail sales rose in May, initial claims for jobless benefits fell, but household wealth declined for the seventh straight quarter to the lowest level since 2004.

So where does all this leave us? We believe that the general market may have got ahead of itself. We are relieved that there has been movement away from financial meltdown ,but no confidence that economy is on a sustained path to recovery. We have talked in previous blogs about our reasons for this, notably the weakness of the consumer, but we are also greatly concerned about the size of the government debt and how this is going to be financed. There is just too much  drag on the economy.

 

STOCK MARKET:

A reason why the market has been doing so well recently, apart from the relief that the financial world did not collapse, is that investors risk appetite has increased away from the near zero returns on CD’s, Money Market Funds etc. Nevertheless this  cannot continue if rates increase, thus choking off any possible recovery in economic activity. Continued rises in commodity prices, particularly oil, will have a similar effect.

 

COMMODITY MARKET:

Oil continued it’s strong run as a hedge against a weakening dollar and inflation fears. It’s up 100% over the past 3 months, putting additional stress on the consumer ,although a stronger dollar at the end of the week caused a drop in gold on Friday. So it is all about the US Dollar. The stronger it gets the weaker commodity prices become and vice versa.

 

CREDIT MARKET:

It seems that not even the Federal Reserve has a clear policy on rising Treasury yields .Do they buy more aggressively to keep rates down or let the market dictate the direction? It seems they are pursuing the latter strategy for now, despite a rise in the 10 year from 3.125% as recently as May 15 to a peak of almost 4% during the week. Why the increase? It’s largely on speculation that the Fed would have to raise interest rates as the economy improves this year. The primary dealers of US Government securities say that the speculators are wrong, that there is still too much weakness in the economy to warrant it. We agree.

 

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 5 2009

June 8, 2009
Market Statistics                   52 week
           

Low

High
DowJones +262.80points

+3.09%

to

8763.13

  6,547.05 13,058.20                                             
Nasdaq + 75.09 points

+4.23%

to

1849.42

  1,268.64 2,549.94
S&P 500 + 20.95 points

+2.28%

to

940.09

  676.53 1,426.63
Crude Oil +$2.13/barrel

+3.21%

to

$68.44

  $33.87 $145.29
Gold ($17.10/oz)

(1.75%)

to

$961.70

  $704.90 $1,001.80
10 Year Tsy +0.394% to

3.861%

  2.04% 4.32%
     

 

     
     

 

     

 

                                                                                                       

 

 

 

 

 WALL ST JOURNAL

 

 

 

 

OVERVIEW:

 “The market can stay irrational longer than you can stay solvent,” John Maynard Keynes (attributed).

This aptly describes the current environment where, despite as much negative news as positive, the major stock indexes continued their strong run this past week An improvement in consumer sentiment was a key factor in the previous weeks market rise. After all, if the consumer is more confident and this leads to more spending, then the economy will be pulled out of the recession and any deflationary fears will subside, so goes the theory….Not so fast. Improved confidence, as we suggested last week, does not necessarily translate into spending. In fact this past week we saw monthly same store sales in May for 30 retail chains fall worse than expected. What  is happening here? Quite simply households are being prudent, deferring big ticket purchases, conserving, while recovering from depleted personal net worth (IRA’s/401K’s/home prices)  and/or job loss and/or tightening consumer credit. On the job front, employers in May cut 345,000 jobs , the slowest in eight months. However the unemployment rate rose to 9.4%,the highest in 25 years.

Federal Reserve Chairman Bernanke testifying before the House Budget Committee last week painted a picture of an economy whose decline is slowing , with a recovery expected later this year ,but one which will be gradual. He expressed also the need to address the rising debt levels.

The current environment strikes us as the “fingers crossed” economy where everyone wants the Government to succeed , but where we are in such unchartered territory, no one really knows if it will. Hence the dialogue in the press between those so called experts  predicting inflation and those predicting deflation.

 

 

 

STOCK MARKET:

Apart from the raw number gain this week ,an important technical target was reached  in the S&P 500.It closed above it’s 200 day moving average for the first time since December 2007. This moving average is seen as the dividing line between a stock (or index) that is healthy and one that is not .It is regarded as  a good indicator of future  price movements, in  that market gains have largely occurred when the index is above the 200 day moving average.

As we have said before, the markets future progress will now depend on trends of sustained and consistent economic improvement, not a relief things are “less worse” or that there is one piece of positive news followed by one negative. We do not expect this good news trend scenario to unfold in 2009,but rather one with continued mixed signals.

 

COMMODITY MARKET:

Oil continued to rise with Goldman Sachs predicting $85/barrel by the end of 2009.According to the Canadian Asset Management firm, Gluskin Sheff, a rise of 45 cents per gallon in gasoline prices over the past month is the annualized equivalent of a $60 billion pay cut for American consumers. It is little surprise that the consumer is not rushing out to spend .

Gold declined for the week as the US Dollar strengthened and Gold funds sold off in the light of the steep price rises of late.

 

CREDIT MARKET:

The single  most important issue for us this week was the continued rise in  yields in both the 2 and 10 year Treasuries and the apparent reluctance of the Government to  commit to buy more than the announced $300 billion in Bonds in order to dampen any rate increases. Allowing continued higher  interest rate levels at this premature stage in the economic cycle  is likely to choke off any recovery led by consumers and businesses and would be in our view self defeating.